India's Infrastructure Drive Must Steer Around Potholes

ENLARGE

Construction work on National Highway 1, in Amritsar, India.
Bloomberg News

By

Peter Stein

Updated April 10, 2010 12:01 a.m. ET

Upgrading infrastructure has fueled rapid economic growth in the world's most populous country, China. Hope is springing once again that the second-most-populous one, India, might follow the same path. To avoid disenchantment, India will need to work extra hard to get support from investors at home and abroad, and to deliver on past promises.

China, with its sprawling networks of new highways, airports and budding high-speed rail connections, makes for a daunting comparison. India has weaker government finances and an unruly democratic government that lacks China's authoritarian discipline. Clearing land for roads or power plants in China is a cinch; not so in India, where land rights are often hugely contentious. Government-backed companies have led China's infrastructure build-out. India's push will depend heavily on the private sector. And India, with its history of murky and investor-unfriendly rules on infrastructure investment, has a record of disappointment.

But the government of Prime Minister Manmohan Singh, empowered by a decisive victory for his Congress party in elections last year, is making infrastructure a priority, with roads a particular focus of attention.

Kamal Nath, a high-profile politician, has taken on responsibility for roads and highways in what's widely seen as a sign of the post's new importance. His goal is to build 20 kilometers of new highway a day, and he's seeking $41 billion in private-sector investment over the next three to four years to help fund the construction.

He knows the depth of the problem. At a conference cohosted by The Wall Street Journal Asia in New Delhi last month, Mr. Nath declared that of India's 70,000 kilometers of highways, 16,000 "aren't worth driving on," and noted that 40% of India's fruits and vegetables rot before reaching market because of delays from poor roads and rail lines.

One thing in India's favor is an active stock market for raising funds. Infrastructure companies have raised about $6.3 billion since the beginning of 2008 on the Bombay Stock Exchange, according to Dealogic. Much of that has been for power projects, though road companies have gone to market as well. The most recent, IL&FS Transportation Networks Ltd., raised a modest $138 million in an offering that began trading March 30.

Attracting support from institutional investors, including foreign pension funds and insurance companies, won't be so easy. Many are wary of directly funding so-called greenfield projects that have yet to break ground, for fear of getting caught up in the kinds of disputes that torpedoed past investments such as Enron Corp.'s ill-fated Dabhol power project. The $2.9 billion plant closed in June 2001 after the loss-plagued Maharashtra State Electricity Board stopped payments, saying the rates were too high. Subsequent attempts to rescue the project have failed. And investors keen on emerging-market infrastructure plays have other options, not least China among them.

Still, some foreign investors are showing interest in companies that have already taken on the greenfield risk. On Friday, GMR Energy Ltd, the energy unit of India's GMR Infrastructure Ltd., said Singapore state investment firm Temasek Holdings Pte. Ltd. will invest $200 million to fund existing projects. Last month, a consortium of global investors led by Morgan Stanley Infrastructure Partners agreed to invest $425 million in Asian Genco Pte. Ltd., an Indian power company.

Mr. Nath has recently been to Hong Kong and Tokyo trying to drum up interest from other big investors. He's offering incentives that include a 10-year tax holiday and allowing foreign investors to take up to 100% of projects. "I do get the sense that foreign institutional investors are quite keen on coming to India overall and specifically for infrastructure," says Pankaj Vaish, managing director and head of global markets for India at Nomura Holdings Inc. "The key," he notes, "is the terms and conditions and valuations."

New road concessions will come up for bidding soon—-as many as nine megaprojects in the next few months, Mr. Nath said recently. Terms such as those that set caps on tolls need to be attractive enough to attract quality builders, but tough enough to enforce quality control. Building roads isn't enough: Building them to last and maintaining them is the key.

The other big litmus test of India's infrastructure prospects could be how well power companies that raised billions of dollars through the stock market in the last few years execute their plans. Reliance Power Ltd., a utility controlled by billionaire Anil Ambani, started generating power at its first project in December after raising $3 billion in January 2008. A high valuation doomed that initial public offering, India's largest ever, to failure in the aftermarket; the stock today still trades at a fraction of its offering price.

Further evidence that the money Reliance Power and others have raised is contributing desperately needed power to India's feeble electrical grid and earning profits in the process would encourage more investment. Maggie Lee, who lead manages the Invesco Asian infrastructure fund, notes Invesco won't invest in a company without reported profits. But once it generates positive cash flow, the story can change.

"In India, historically, they overpromise and underdeliver," says Ms. Lee. However, if infrastructure investment really starts to take off, she adds, "India, over the longer term, could be theoretically more exciting" than China. That's a hope India's government and the private companies leading its infrastructure drive should strive hard not to dash.

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